Uncover private credit opportunities in volatile times
Prath Reddy, CFA, is President of Percent, the platform powering the future of private markets. Founded in 2018, the company leverages proprietary technology, integrations and data to bring unprecedented transparency and efficiency to private credit transactions. To date, its platforms have generated over $950 million in trading volume across a multi-trillion dollar private credit market.
Russ Alan Prince: Given recent market volatility, where can investors find opportunities?
Prath Reddy: There are always opportunities to be found. In volatile markets, it is important to be aware of the moment because each market reacts differently to events. Investors who can invest in any market – public or private, equity or debt – can pick and choose, paying attention to key market indicators.
Macro risks first affect public markets. Private debt, where Percent operates, is initially somewhat isolated from what happens in public markets. Even when he catches up, he is affected in less obvious and dramatic ways.
Benefiting from advance warning from the public markets, underwriters of private debt generally have time to identify ways to restructure transactions in the event of an observable or anticipated deterioration in the quality of the underlying credit. Lenders and investors may also demand higher rates given broader market conditions. While this is a more active approach to investing and private debt comes with its own set of risks, there are opportunities to exercise control and ultimately preserve capital. in an uncertain context.
Prince: What are percentage weighted scores? How do they benefit investors?
Red: Percent Blended Notes give investors exposure to a number of Percent offerings and private credit transactions offered on the Percent Market. It is analogous to a basket of ETFs on the stock markets; each Blended Note has a theme and includes diverse assets.
A mixed rating might consist of US borrowers, while another might only include short-term or senior transactions. Proceeds from each blended note are deployed into any number of underlying transactions that meet the theme’s particular eligibility criteria. Investors gain exposure to multiple transactions that adhere to specific themes and can build a portfolio of Percent Blended Notes based on their investment preferences and market view.
Percent Blended Notes offer other advantages over direct single-borrower loans. Transactions in Percent Blended Notes are generally short term with embedded call options. As a result, the underlying borrowers frequently refinance these transactions, resulting in an effective term that is generally shorter than the total term marketed.
This allows investors to benefit from higher rates as each underlying transaction is refinanced in a rising rate environment. Price decline is minimized as these securities are neither liquid nor negotiable and therefore are not marked to market. For example, you are not buying a fixed rate bond but a variable coupon note. The variable rate is based on the total interest payments made by all transactions in which the Percent Blended Notes participate, less a 1% management fee.
These factors make Percent Blended Notes attractive to accredited institutional and retail investors, including high net worth investors seeking greater control over their own wealth. Through Percent Blended Notes and our other offerings, Percent makes private debt easy to integrate into asset allocation, driving diversification and yield. Our platform provides comprehensive tools to perform transaction and borrower due diligence, with the security of comprehensive reporting, investment tracking and investor support.
Prince: Private markets have always lacked transparency. How is Percent changing that?
Red: Technology and transparency have been in Percent’s DNA from the start. Our company was founded to tackle information asymmetry in private credit markets head-on. We’re leveling the playing field to give investors more and better information about the transactions they buy, including information provided by issuers who raise capital in our standardized marketplace.
Through our platform, investors get more transparency on each individual transaction than is typical with other private debt transactions. Often we provide more information about the underlying transaction and the borrower than is even available in public debt markets.
For example, many of Percent’s market transactions are asset-based, meaning the note is backed by a portfolio of assets whose cash flows repay interest and principal. This is similar to asset-backed securities in public markets.
The SEC requires issuers of asset-backed securities to provide portfolio disclosures at least quarterly to inform investors about the performance of those asset portfolios and how that translates to performance of their transaction. On the Percent platform, similar information is often provided daily and if not daily, then weekly or monthly. This provides unparalleled transparency on the assets underlying an investment.
Investors receive regular updates on incoming cash flow, aggregate collateral, performance information of the underlying loans created under this portfolio, delinquency rates, day-overdue analysis, etc They also receive a tremendous amount of granular information, delivered in an digestible manner, giving them visibility into what is really driving their rating’s eventual performance.
To my knowledge, this cannot be found anywhere else, on any other platform, let alone on the open private credit market. This approach is of great interest to institutional investors. We’ve had many conversations with them about using this capability to provide the same level of transparency on their portfolios, even for trades that aren’t in the percentage market.
We remain committed to continuing to resolve the long-standing issues that exist in the private credit markets. It is inconceivable that institutional investors in private credit often do not have the tools to value their own portfolios, simply because there has been no centralized market infrastructure similar to public markets until now. Percent changed that by creating a standardized marketplace for all market participants – borrowers, investors and underwriters – and providing single access to private market opportunities.
RUSS ALAN PRINCE is executive director of Private Wealth magazine (pw-mag.com) and chief content officer for High-Net-Worth Genius (hnwgenius.com). He consults family offices, quick-and-rich entrepreneurs and selected professionals.
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